BY OFFERING partial bail-outs to countries in the euro area, the authorities are buying time. Time for what? The hope is that over a few years the indebted economies on the continent’s periphery, such as Ireland and Greece, will be able to restore their competitiveness. That would boost their exports and output, helping them to close their fiscal and current-account deficits. Just how realistic is this hope?Competitiveness is usually taken to mean keen prices: if the price of cars produced in one country falls, foreign demand for them expands. In a monetary union, with the nominal exchange rate irrevocably fixed, it is not possible to gain competitiveness by currency depreciation. The only way is to reduce costs, relative to countries inside and outside the currency area. Economists sometimes refer to this as a “real depreciation” or “internal devaluation”. That requires slower price and wage growth or faster productivity growth than elsewhere. Given today’s low inflation rates, it means outright declines in prices and wages.
To read the full, original article click on this link: Economics focus: All pain, no gain? | The Economist
